Key takeaways

  • Work capital loans come in different forms and can be used to cover short-term expenses
  • Your credit score and how much you can afford can impact your available loan options
  • Compare lenders and types of working capital loans to find the right one for your business

A working capital loan is an umbrella term used to encompass a variety of loan products. The main thing to know is that if you talk to a lender about a working capital loan, you’re telling them you’re looking for short-term financing. You might use this to cover payroll or lease payments during a seasonal ebb, for example, not a long-term expense like financing real estate or major equipment purchases.

As a result, short-term loans can be working capital loans, but so can lines of credit, business credit cards and merchant cash advances. You have options here. Finding the right one means exploring working capital loans for small businesses based on the various types, what you can afford and qualify for and which lender you want to choose. To help narrow down your options, think about the following questions.

How much can you afford?

First up, you want to make sure that this short-term solution to your cash flow problems doesn’t land you in long-term financial trouble. You need to be able to repay what you borrow. Defaulting could mean tanking your business and potentially even risking your personal assets.

Do the math. You need to know the potential cost of the working capital loan, including interest and fees, and how much you can afford. 

Don’t stop there, though. Different lenders attach different fees to their working capital loan offerings. So read the fine print on any loan you consider to ensure you have a good idea of what it will cost your business, both in terms of periodic repayments and in terms of total loan cost (including interest and fees).

If you’re trying to get a bad credit business loan to cover short-term expenses, budget more for the cost of your loan. A low credit score will mean a higher interest rate and more fees.

Bankrate insight

Use a business loan calculator to get an idea of how much your working capital loan will cost over its life and the amount of the monthly payments.

What type of working capital loan?

Working capital loans for small businesses can take different forms. The right short-term option for your company will depend on your personal and business credit scores, your preferred repayment timeline and even how your customers pay you. Here are a few of your options:

Loan type Pros Cons
Short-term loan
  • Lump sum payment to use how you need
  • Fast and frequent repayment
  • Higher rates than long-term loans
SBA loans
  • Backed by the Small Business Administration (SBA), which increases accessibility
  • Lower interest rates and lower fees
  • Long and rigorous application process
  • Strict qualification criteria
Lines of credit
  • Access to money (up to your credit limit) to draw from as your business needs it
  • Pay interest only on what you borrow
  • Short terms (usually one year), after which you have to start repayment
  • Lower loan amounts than term loans
Business credit card
  • Flexibility to use money when and how you need, up to your credit limit
  • Generally, lower eligibility requirements than an SBA working capital loan, term loan or line of credit
  • Possibility of free employee cards and rewards as you spend (cashback, miles)
  • Lower loan amounts than term loans
  • Temptation to use more than you need, building more debt for your company
Invoice financing/factoring
  • Ability to get cash from your outstanding invoices now
  • Low eligibility requirements
  • Higher costs than other types of working capital
  • Requires your invoiced clients to have good credit and repayment habits
Merchant cash advance
  • Ability to repay what you borrow as customers make credit card payments
  • Low eligibility requirements
  • High loan costs
Bankrate insight

Not sure a working capital loan is right for you? Check out our alternatives to learn more about different types of long-term financing solutions.

Interest rates vs. factor rates

As you’re digging into different working capital loan options, you might see the cost of your business loan expressed in one of three ways: as an interest rate, as an annual percentage rate (APR) or as a factor rate.

Interest rates are expressed as a percentage. APR is also a percentage, but it tells you the total cost of the loan over a year, which means it factors in any fees.

Factor rates get expressed as a decimal. You’ll most frequently see a factor rate with high-cost loan types available to businesses with bad credit, like merchant cash advances and invoice factoring.

One key difference to note is that while interest payments go down as your loan amount decreases, factor rates stay the same for the life of the loan. It’s also a good idea to convert factor rates to interest rates so you can compare loan products and get a more accurate idea of how costly they can be.

What’s your credit score?

As you’re exploring working capital loans for small businesses, your personal credit score will play a big role in your available options:

700 or above You should have the full run of choices available, which means you can look to traditional lending institutions like banks and credit unions. These generally offer the lowest interest rates.
650 to 699 You’ll still have quite a few choices and can likely qualify for an SBA working capital loan, which can help to keep your interest rate down.
600 to 649 You can see if banks and credit unions will work with your business, but an unsecured working capital loan is likely off the table unless you go with a high-cost option like invoice factoring.
500 to 599 You’re right on the cusp of getting stuck with expensive financing options like merchant cash advances and invoice factoring. Explore online lenders since their eligibility requirements are generally looser.

Bankrate tip
Lenders may consider both business and personal credit scores, which provide insights into creditworthiness and financial stability. A business credit score reflects a company’s financial responsibility, while a personal credit score reflects an individual’s financial reliability. If you haven’t built up your business credit, lenders may use your personal credit score.

Which lender?

Now, it’s time to start the main comparison work. Look into specific working capital lenders to get a feel for their working capital loan types, along with their rates, fees and terms.

Pay close attention to that repayment term. Many working capital loan options come with a term of a year or less, which means this truly needs to be a short-term solution for your business. Some lenders offer options with terms of 18 or 24 months. This can make payments more manageable, but you’ll pay more in interest.

Examples of working capital lenders

To help you find the right working capital loan for your business, here are a few notable lending institutions to explore:

Lender Type of working capital loans Top features
Bank of America
  • Line of credit
  • Business credit card
  • Option for unsecured lines of credit that don’t require collateral
  • No cash advance fees for lines of credit
  • Bonus rewards when you sign up for a business credit card
  • Four different business credit card options, all with $0 annual fees
Wells Fargo
  • Line of credit
  • Business credit card
  • Line of credit options for businesses existing fewer than two years
  • Free rewards program enrollment with line of credit
  • Bonus rewards when you sign up for a business credit card
  • Two different business credit card options
  • Term loan
  • Line of credit
  • Merchant cash advance
  • Invoice factoring
  • Fast application process and fast funding if approved
  • Loyalty benefits: if you take out another loan with OnDeck, the company waives remaining interest on your current loan
  • Lower eligibility requirements: one year in business, $100,000 in annual revenue, personal credit score of 625
National Funding
  • Term loan
  • Fast application process and fast funding if approved
  • Fixed terms with automatic payment options
  • No business collateral requirement (but the company does require a personal guarantee)
Taycor Financial
  • Term loan
  • Line of credit
  • Loan amounts up to $400,000
  • Online application process that doesn’t require tax returns
  • No monthly service fees for lines of credit

Are you eligible?

Generally, to qualify for a working capital loan, you’ll need to have:

  • At least two years in business
  • Annual revenue around $250,000
  • Personal credit score of at least 600

Not only can meeting these requirements get you approved, but it can also get you access to favorable terms when applying for working capital loans for small businesses. That said, some lenders will work with people with lower scores, especially if you’re willing to secure the loan.

Securing the loan means putting up something the lender could seize if you default. That could mean offering business collateral, making a personal guarantee (which means putting your personal assets on the line) or both.

That might sound risky, but it could be a boon. An unsecured working capital loan will generally come with a higher interest rate and less favorable payment terms than one that’s secured. Plus, many lenders that work with business owners with fair and bad credit don’t offer an unsecured working capital loan, which means your lending options would be limited.

Bankrate insight

It’s possible to get a business loan or line of credit with a credit score as low as 500. While many of those loans will come with high interest rates, some loans like SBA microloans have capped interest rates that could make them the most affordable option for business owners with bad credit.

Bottom line

Working capital loans for small businesses can help you weather a seasonal downturn, deal with a short-term emergency or get through a dip in sales. You should consider these short-term loans only when you know two things: your finances will turn around quickly, and you can make the rapid repayment needed.

Does that sound like you? If so, explore the best working capital loans and your other short-term financing options.

Frequently asked question

  • Your options might be limited. For example, you probably won’t be able to get an SBA working capital loan. But you should check with specific lenders to see if other factors — like your time in business or your annual revenue — can help to make up for a low credit score. If not, you can always explore options like invoice factoring and merchant cash advances. Just make sure your business is ready for the high cost of these types of working capital financing.
  • Term loans can come with repayment terms from six months to 25 years. Generally, working capital loans cover short-term cash flow needs, which means only short-term loans (those with terms of 24 months or less) count here. Plus, you have working capital loan options beyond term loans, from lines of credit and credit cards to invoice factoring and merchant cash advances.
  • Absolutely. A short-term loan can help you get the financing you need to keep working capital on hand. Beyond that, you have choices like a business line of credit or business credit cards or higher-cost financing like merchant cash advances and invoice factoring.